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Other income grows by 155% due to higher proportion of income from securitization and investments.

Net profits grow by 58% YoY in 1HFY10 aided by low interest expenses, and a jump in other income.

Net NPA ratio declined from 0.7% in 1HFY10 to 0.5% in 1HFY11.

The company also declared an interim dividend of Rs 2.5 per share.

Rs (m)

2QFY10

2QFY11

Change

1HFY10

1HFY11

Change

Income from operations

10,523

12,969

23.2%

20,592

25,238

22.6%

Interest Expense

5,382

5,850

8.7%

10,910

11,418

4.7%

Net Interest Income

5,141

7,119

38.5%

9,682

13,820

42.7%

Net interest margin (%)

6.9%

8.2%

Other Income

188

460

145.2%

417

1,060

154.5%

Other Expense

1,149

1,854

61.3%

2,515

3,529

40.3%

Provisions and contingencies

1,116

1,264

13.2%

2,051

2,545

24.0%

Profit before tax

3,063

4,461

45.7%

5,532

8,806

59.2%

Tax

988

1,472

48.9%

1,813

2,927

61.4%

Profit after tax/ (loss)

2,075

2,990

44.1%

3,719

5,879

58.1%

Net profit margin (%)

19.7%

23.1%

18.1%

23.3%

No. of shares (m)

118.3

132.2

Book value per share (Rs)

196.4

P/BV (x)*

4.1

* Book value as on 30th September 2010

What has driven performance in 1HFY11?

The country’s largest NBFC in terms of asset size Shriram Transport Finance (STFC) continued to maintain its stronghold over financing used vehicles and optimsed on the same. It fetched higher NIMs of 8.2% in 1HFY11 as against 6.9% in 1HFY10. This was nevertheless at least 3% higher than that of the best performing banks. The institution sustained robust return on equity of 28%. Its ROAs also improved to 4.3% from 2.9% in 1HFY10.

Demand for loans against pre-owned commercial vehicles has continued to support STFC’s business even in difficult times. With interest rates cooling off, STFC managed to grow its disbursements at an accelerated pace of 25%. The growth in disbursements in 1HFY11 also saw a strong performance from the new CV space. It increased at a robust pace of 31% during 1HFY11. Compared to the same quarter last year, the growth in new vehicles was an even more impressive 58%. However, with securitisation of most of the incremental and long duration assets the growth in receivables was pretty much flat. The company’s assets under management (AUM) in terms of new and pre-owned vehicles were re-balanced with older vehicles enjoying a larger composition. The improvement of yields as well as an increase in spreads contributed to the increase in margins (NIMs) from 6.9% to 8.2%.

Balanced growth in assets...

(Rs m)

1HFY10

% of total

1HFY11

% of total

Change

Truck receivables

203,549

204,485

0.5%

Disbursements

68,359

85,384

24.9%

New CVs

13,317

19.5%

17,416

20.4%

30.8%

Pre-owned CVs

55,042

80.5%

67,969

79.6%

23.5%

While STFC's borrowing profile is largely tilted in favour of banks, the institution derived 81% of its funds from banks in 2QFY11 as against 86% in 2QFY10. Last year, the fall in cost of bank funding helped the company pass on the lower rates to customers. However, with the base rate regime now in place, the company may face some pressure in terms of interest costs as borrowing may get more expensive. Nevertheless, due to better credit rating and increased institutional funding the NIMs are expected to sustain in the range of 7.0% to 8%.

STFC's cost to income ratio remained benign at 24% in 2QFY11 (22% in 2QFY10) due to its operating leverage. The company added 682 new employees in the quarter and thus employee costs rose sharply by 74% YoY in 2QFY11. With a branch network of 487 offices, and additional employees, the company seems well poised for growth. The company stands well capitalized with its capital adequacy in excess of 24% at the end of 1HFY11. This will enable it to sustain its loan growth in the medium term. STFC’s disbursement target for FY11 is between 25-30%. The company also raised Rs 6.5 bn through fixed deposits in 2QFY11.

What to expect?

At the current price of Rs 873, the stock is valued at 3.0 times our estimated FY13 adjusted book value. The company has been seeing aggressive demand in the CV space. This demand is expected to spill over into the next half as well with the good monsoon and the festival season. Demand for both new as well as old vehicles is going strong. Prices of vehicles have also been moving up due to inflationary scenario and higher demand for vehicles with economic buoyancy. The company expects the proportion of old and new vehicles to however remain in the 70:30 range as the yields achieved on older vehicles is higher. Shriram Automall, a platform for second-hand vehicle market now has 2 divisions operational. It will start physical operations either this quarter or beginning of 4QFY11, across India. This business will not require much capital to be employed in it as the centers will be on lease. This business will however provide better visibility to the parent company.

The company has delivered a good set of numbers, and has crossed our target price. At this juncture however, we believe that the stock is fairly priced. Researchpro subscribers can view our updates here. Going by the robust performance of the company, we will soon review our projections and update subscribers on the same.

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